The UK's regulators are pursuing policies that appease the public, rather than those that solve the problems that triggered the financial crisis.
With banking assets many times the size of its economy, the UK suffered hugely from the financial crisis. Two major private sector banks, Royal Bank of Scotland and Lloyds, had to be bailed out and remain under partial government ownership.
Small wonder therefore that the UK has followed a fairly draconian path in pursuit of a fail-safe regulatory regime – the latest example of this being June’s government report on banking standards, which recommended jail sentences for reckless bank management, deferrals in remuneration of up to 10 years and a regime for assigning responsibilities to a specific banker so that they cannot hide poor outcomes behind collective decision making.
If these proposals are adopted, on top of reforms already in motion to ring-fence retail activities from investment banking and to give the treasury the power to make banks carry bail-in bonds, the UK will wind up with one of the toughest regimes in the world. The US, France and Germany by contrast are only separating out proprietary trading, which is a much softer option.
But for all that, is the UK’s new approach really fit for purpose? Even with so much bluster and tough talking, the UK government has still failed to implement measures to tackle head-on the one asset bubble that is behind so many financial crashes – housing.
The UK has a new macro-prudential regulator, the Financial Policy Committee, but so far there has been a great reluctance to include loan-to-value and loan-to-income caps on mortgages as part of the toolkit.
This is in contrast to many emerging markets, which use them freely to cool down frothy property markets and even adjust risk weightings as a further measure if they are not getting the desired result.
Unfortunately, the UK regime still seems mired in politics when sending bankers to jail (popular) takes precedence over the much more essential measures of cooling the housing market (unpopular politically) in times of excess.
The hope must be that the Bank of England’s new governor, Mark Carney, takes a fresh and more detached view of things.
